Can You Take Money Out of a 401(k)? Penalties, Loans, and Rollovers

Yes, you can take money out of a 401(k), but whether it costs you a 10% penalty on top of ordinary income tax depends on your age, whether you still work for the employer that sponsors the plan, and whether your reason fits one of the exceptions the IRS recognizes. The cleanest access opens at 59½. Before that, you have options, and most of them come with a bill.

When You Can Withdraw Without the 10% Penalty

Federal law only permits a distribution from a 401(k) when a qualifying event occurs. The main triggers are reaching a certain age, leaving your job, becoming disabled, or the plan itself being terminated.¹ Hitting one of those triggers is what lets you take the money at all. Avoiding the 10% early withdrawal penalty is a separate question with its own rules.

At Age 59½

Once you reach 59½, you can take distributions from your 401(k) for any reason without the 10% early withdrawal penalty. You don’t need to leave your job or show any financial need. The money is still subject to regular income tax, but the penalty is gone.²

The Rule of 55

If you leave your job during or after the calendar year you turn 55, you can withdraw from that employer’s 401(k) without the 10% penalty. This is often called the Rule of 55. What matters is that your separation from service happens in or after the year you reach 55, not that you wait until your 55th birthday to take the money.² Public safety employees in a governmental plan qualify at age 50.

This exception only applies to the 401(k) at the employer you most recently left. Roll the money into an IRA and you lose the Rule of 55 protection, and any withdrawal before 59½ would face the penalty.¹

Other Situations That Waive the Penalty

Congress has carved out a long list of exceptions that waive the 10% penalty even when you’re under 59½. Income tax still applies, but the extra 10% doesn’t. Several were added by the SECURE 2.0 Act starting in 2024. The exceptions most relevant to 401(k) plans include:²

Total and permanent disability, at any age.
Substantially equal periodic payments (SEPP) based on your life expectancy, which must continue for at least five years or until you reach 59½, whichever is later.
Qualified birth or adoption expenses, up to $5,000 per child.
An emergency personal expense, once per calendar year, up to the lesser of $1,000 or your vested balance above $1,000.
Domestic abuse victim distributions, up to the lesser of $10,000 (indexed) or 50% of your vested balance, with a three-year repayment option.
Terminal illness certified by a physician.
Federally declared disaster losses, up to $22,000 per disaster.
Payments to a spouse, former spouse, or dependent under a Qualified Domestic Relations Order in a divorce.
Distributions the IRS levied from the plan.
Military reservists called to active duty for at least 180 days.

The SEPP option needs planning. You pick one of three IRS-approved calculation methods and can’t modify the payment schedule early without triggering a retroactive recapture tax on all the prior penalty-free distributions.³

What an Early Withdrawal Actually Costs

Any distribution before age 59½ that doesn’t qualify for an exception triggers a 10% additional tax on the taxable portion, on top of regular income tax.² For someone in the 22% federal bracket, a $20,000 early withdrawal loses roughly $6,400 to taxes and penalties, leaving about $13,600 in hand. State income tax, if your state has one, comes off the top of that too.

The plan is required to withhold 20% of the taxable amount for federal taxes before it sends you the money on most lump-sum or partial withdrawals. That withholding is a prepayment, not the final bill. If your total income for the year puts you in a higher bracket, you’ll owe more when you file; if it puts you in a lower one, you’ll get some back.

Hardship Withdrawals While Still Employed

Even while you’re still working and under 59½, your plan may allow a hardship withdrawal if you face a serious and immediate financial need. Not every 401(k) plan offers this; it depends on your plan’s terms. Where it’s available, the IRS recognizes these safe harbor expenses as an immediate and heavy financial need:⁴

Unreimbursed medical expenses for you, your spouse, dependents, or a plan beneficiary.
Costs directly related to buying your principal residence, not counting mortgage payments.
Payments needed to prevent eviction from or foreclosure on your principal residence.
Tuition, related fees, and room and board for the next 12 months of post-secondary education for you or family members.
Funeral or burial expenses for you or family members.
Certain repair costs for damage to your principal residence.

You can only take out what you actually need, including the taxes and penalties on the distribution itself.⁴ Hardship withdrawals are subject to income tax and, if you’re under 59½, generally the 10% early withdrawal penalty. They cannot be rolled over into another retirement account.

You generally have to have exhausted other available resources first, including any plan loan. Many plans let you self-certify this in a written statement rather than proving you explored every alternative. Your employer can rely on that written representation unless it knows the statement is false.⁴

Borrowing From Your 401(k) Instead

If your plan allows loans, borrowing from your own 401(k) lets you access funds without owing income tax or the early withdrawal penalty, as long as you repay on time. The maximum is the lesser of $50,000 or 50% of your vested account balance. Some plans allow you to borrow up to $10,000 if 50% of your vested balance is under that amount, but plans aren’t required to offer this.⁵

You must repay the loan within five years, with payments at least quarterly in substantially equal installments covering principal and interest. If the loan is to buy your primary home, the plan can extend that period.⁶ The interest you pay goes back into your own account.

The Trap if You Leave Your Job

If you have an outstanding 401(k) loan when you separate from your employer, most plans require repayment in full within a short window, often 60 to 90 days depending on the plan. If you can’t repay, the unpaid balance is treated as a distribution. You’ll owe income tax on it, plus the 10% penalty if you’re under 59½.⁷

When the plan reduces your balance to offset the unpaid loan, called a plan loan offset, you have longer to avoid the tax hit. You can roll that offset amount into an IRA or another qualified plan by the due date of your federal tax return, including extensions, for the year of the offset.⁶ That means finding the cash elsewhere to make the rollover, since the original money is already gone.

Roth 401(k) Money Works Differently

If your plan includes a designated Roth 401(k) account, the tax treatment on withdrawal isn’t the same as a traditional 401(k). Roth contributions went in after tax, so you’ve already paid tax on that money. The question is whether the earnings come out tax-free too.

A qualified distribution, meaning one taken after 59½ (or due to disability or death) and after you’ve held the Roth account for at least five tax years, is entirely tax-free, earnings included.⁸ The five-year clock starts January 1 of the first year you made a Roth contribution to that plan.

If you don’t meet both requirements, the contributions part isn’t taxed, but the earnings part is included in gross income and may face the 10% penalty.⁸ Access rules are otherwise the same: you still need a qualifying event to take the money out at all.

Rolling Over Instead of Taking the Money

One boundary worth naming: if you’re leaving your job and don’t actually need cash in hand, rolling your 401(k) into an IRA or a new employer’s plan avoids all current taxes and penalties. A direct rollover, where the plan sends the funds straight to the new account, is the simple version. An indirect rollover pays the money to you and gives you 60 days to redeposit it, but the plan will withhold 20% of the taxable amount up front; to complete a full rollover, you have to cover that 20% from other funds and claim it back on your tax return.⁹

How to Request the Withdrawal

Before any money leaves your 401(k), the plan administrator has to give you a written explanation of the tax consequences, including your right to roll the distribution over instead. This is sometimes called a Section 402(f) notice, and it must arrive within a reasonable period before the distribution is processed.¹⁰

Most plans let you start the process through an online participant portal, though some still use paper forms. You’ll typically provide your Social Security number, the dollar amount you want, how you want it delivered (check or electronic transfer), and your federal tax withholding preference. For a hardship withdrawal, expect to submit supporting documents like medical bills, a purchase agreement, or an eviction notice, or a written self-certification of the financial need.

The administrator reviews the request to confirm it complies with federal rules and the plan’s own terms, and verifies you have enough vested funds. Processing usually takes several business days. Some plans charge a small administrative fee for distributions or loans; the plan’s fee disclosure documents will list any charges.¹¹ Keep the approval notice and distribution records for your tax file. You’ll receive Form 1099-R by the end of January reporting the withdrawal to the IRS, and if you qualify for a penalty exception that the form doesn’t reflect, you can claim it by filing Form 5329 with your return.

1
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
2
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
3
Internal Revenue Service. Substantially Equal Periodic Payments
4
Internal Revenue Service. Retirement Topics – Hardship Distributions
5
Internal Revenue Service. Retirement Topics – Plan Loans
6
Internal Revenue Service. Retirement Plans FAQs Regarding Loans
7
eCFR. 26 CFR 1.72(p)-1 – Loans Treated as Distributions
8
Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
9
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
10
Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust
11
U.S. Department of Labor. A Look at 401(k) Plan Fees